The document discusses the purchasing power parity (PPP) theory of exchange rates. PPP states that inflation rates should be reflected in changes in exchange rates to keep prices of identical goods equal across countries. It assumes the "law of one price," where identical goods have the same price globally excluding transaction costs. The theory was introduced in the 1920s as hyperinflation caused currency depreciation. Absolute PPP posits the exchange rate equals the ratio of price levels between countries. Deviations from absolute PPP can occur in real world markets.